Certain real estate segments may not be the best bet right now. Here's why

All industries go through cycles, but real estate cycles are specific micro markets. “While the Chennai market is entering a correction phase, Hyderabad has started picking up, due to the resolution of political uncertainty there, and this trend may continue in the coming years,” says A.S. Sivaramakrishnan, Head, Residential Services, CBRE South Asia.

It is interesting to note that Hyderabad is also at the top of the charts in terms of rental yield. There are several other micro markets that are best avoided at present, and the reasons vary from overpricing to city-specific issues. Here’s a closer look at a few to help you understand why they aren’t the best bet right now.

South and Central MumbaiThe shift of the city’s focus to the north is putting pressure on South Mumbai properties (most offices have shifted either to the BKC or Parel). A very high price range is another deterrent for South Mumbai investors. “Future price hikes in suburbs like Virar or Badlapur will be much higher than South Mumbai, where the prices have already reached Rs 60,000 per sq. ft.,” says Ajay Jain, ED-Centrum Capital and Head, Real Estate Group.

Although the prices are relatively low at around Rs 25,000 per sq ft in Central Mumbai areas like Parel, pricing pressures will continue to build because of the huge supply inflow anticipated in the near future. Further, despite several offices being present in these areas, rental yield is also low.

Gurgaon and Noida in NCRThe entire National Capital Region (NCR) is still under significant pressure, and according to experts, it is likely to remain so for some time. “The average quoted price came down by 4 per cent in first half of 2016 (on a year-on-year basis) and a similar trend is expected in the second half of the year. Volume is also declining, and positive volume growth may happen only after 12-18 months,” says Samantak Das, Chief Economist and National Director, Research at Knight Frank India.

The most acute pressure is expected in Gurgaon and Noida. First, the promised infrastructure development has not occurred, as a result of which, the end user demand is minimal. Second, builders in these areas have defaulted on delivery for years, and have lost the investors’ trust. “Trust deficit is a problem in markets like Noida, due to this the market has shrunk significantly. However, developers who have delivered in the past are still able to sell,” says Amit Oberoi, National Director, Knowledge Systems, Colliers International (India). Third, the large inventory lying unsold poses a major problem. “Investors should avoid Gurgaon and Noida because there are 10 years of inventory in some pockets of these areas,” says Jain.

ChennaiChennai’s residential market had once fared better than others, but the situation has since changed. Unlike other markets, the pressure has started building up only recently and therefore, may continue for few more quarters. Last year’s deluge, which severely impacted some pockets of the city, is another reason for this. “The Chennai flood is still in the back of investors’ minds. This should change after they are convinced that things are under control in these regions during the coming monsoons,” says Oberoi.

However, inventory build-up is not a big issue in the case of Chennai, because of the massive reduction in new launches. “Although sales remained stable in first half of 2016, compared to same period last year, residential launches fell by 36 per cent year on year,” says Das.

Luxury pocketsThe luxury segment, across cities, is still facing pressure. Experts advise that investors should steer clear of this space for the time being. This is because while the need for housing in India is huge, it is not being converted into demand at present, due to affordability issues.

“There is a lot of pent up demand for the mid and affordable segment. Therefore, demand will come to these segments first. While the high-end space may see both time-wise and price-wise correction, it is likely to be be restricted to the former in the mid and affordable segments,” says Sharad Mittal, Director and Head, Real Estate Fund, Motilala Oswal Real Estate.

Uninhabitable areasSince price in cities rise during bull phases, builders often choose remote sites and sell them as ‘affordable housing projects’. However, experts caution against investing for such projects. The normal cycle for such development begins with builders starting construction with the help of investors, and slowly developing the area. Buyers only come in after some basic infrastructure, like proper water supply, public transport, connectivity, etc. are in place. “Since most investors have already vanished from these uninhabitable pockets, development will stagnate and the completion may take a much longer time,” says Pankaj Kapoor, MD, Liases Foras Real Estate Rating and Research.

What should existing investors do?New investors can exercise the necessary caution, but what about the investors who already hold residential real estate? While we are not recommending a total exit from the segment, existing investors should examine whether it make sense to shift a part of their investment from real estate to equities.

Experts are divided. While Freoze Azeez, Deputy CEO, Anand Rathi Private Wealth Managment is of the opinion that it makes sense to shift from real estate to equities for better returns, Sunil Sharma of Sanctum Wealth Management feels that the time to shift has come and gone. “Equities have rallied strongly, while most residential real estate is high priced. So, this is not the time for a tactical shift from one to the other,” Sharma concludes.